RAMCO Weekly Jun. 30, 2015

Paul Resnik operates Resnik Asset Management Co. (RAMCO), a registered investment advisor. 

Overview

Perhaps last week was the calm before the storm as the major indices moved slightly lower in quiet trading. The Dow Jones Industrial Average fell 69.27 points (0.38 percent), the S&P 500 Index declined 8.50 points (0.40 percent), and the Nasdaq Composite was off 36.50 points (0.71 percent). On the plus side for stocks: the Senate passed fast-track trade authority for the president and the House approved a retraining program, clearing the way for the administration to negotiate a global trade deal with particular importance for our relations with Asian countries; health care stocks rallied following the Supreme Court's decision upholding federal tax subsidies to buyers of insurance at federally-sponsored exchanges; the decline in first quarter Gross Domestic Product was revised from 0.7 percent to 0.2 percent; and sales of both new and existing homes hit their highest levels in more than five years. However, the decision by Greek Prime Minister Alexis Tsipras to call a referendum for July 5 on the European Union's bailout conditions increased concerns that the Greek debt situation could completely unravel as the June 30 "deadline" for an agreement may be passed without any resolution. In the meantime, the other June 30 "deadline," the one for an agreement with Iran that would curb its nuclear program, also appears to be getting closer without signs of resolution. Last week's statement by Iran's Supreme Leader Ayatollah Ali Khomeni opposing international inspections of that country's military sites and demanding the immediate lifting of all sanctions upon the reaching of an agreement made such a deal problematic for congressmen from both parties. The sharp pullback for Chinese stocks, the Shanghai Composite fell 7.4% on Friday and is now down 19% from its recent high, also unsettled investors.

In the News

Ambarella (AMBA-101.57) Midnight Comes for Amberella

A week ago Friday, short-selling firm Citron Research released a report on Ambarella, a semiconductor processing solutions company, that called it a “ridiculous” stock and set a 12-month price target of just $60, and an 18-month price target of $40. The report cited commoditization risks, a lack of innovation, and the stock’s “parabolic frenzy.” for its scathing conclusion about the company. On June 19, Ambarella’s fell 7% and another 19% on June 22 to to $96.58. The reversal came after a meteoric rise since the chip-maker’s IPO in 2012, during which time shares increased 21-fold from the $6 offering price. Ambarella has greatly benefited from its partnership with GoPro (GPRO), for whom it supplies the chips for its wearable cameras. However, Citron noted that the Ambarella's stock, based on 2018 earnings estimates, was valued well above that of GoPro's shares. After last week's price action, the shares of both companies are trading at about 27 times next year's average EPS estimates.

Humana (HUM-195.50) Health Care Sector Pac-Man

Humana shares rallied from $163,07 on May 6 to an intraday high of $219.79 on May 29 amidst rumors of potential acquisitions offers for this health insurance company. While Aetna (AET) and Cigna (CI) have been cited as possible buyers of Humana with rumors saying bids have already been made, Cigna itself is the target of a takeover bid by Anthem (ANTM). While talk has discussed a possible $220 acquisition offer for Humana, and analysts believe a deal at that valuation would be accretive to Aetna's long-term earnings, Humana stock actually finished this week down 3% at $195.50.

The Week Ahead

This week's economic data is expected to mostly portray an improving U.S. economy. The holiday-shortened trading week has an extremely light earnings calendar. In the meantime, the real drama will be taking place overseas. Greece's Prime Minister Alexis Tsipras announced on Sunday that Greek banks would remain shut indefinitely and restrictions would be imposed on cash withdrawals. Tsipras, who made the announcement during a televised address to the nation, said that the decision came on the recommendation of the Bank of Greece. He did not immediately say what types of capital controls would be imposed. For the past two days, Greeks had been rushing to ATMs to withdraw money across the country following Tsipras' sudden decision to call a referendum on creditor proposals for Greek reforms in return for vital bailout funds. As the U.S. stock market opens on Monday, shares are set to open sharply lower in response to the Greek situation. Still, many analysts believe Greece will be declared in "arrears," not in "default" on Tuesday; that will give time for a "yes" vote result on the July 5 referendum which will pave the way for an agreement that would keep Greece in the euro currency union. Also on Sunday, U.S. officials confirmed that world powers meeting in Vienna to hammer out the nuclear deal will miss their June 30 deadline. Iran’s foreign minister Mohammed Javad Zarif returned home for consultations on Sunday. However, Zarif is expected to return to Vienna to join counterparts from other countries at the negotiating table to push for a breakthrough on the talks and U.S. officials said they are “unconcerned” about the pace of talks and that Zarif’s trip home had been scheduled in advance. The only Treasury auctions scheduled for this week are on: Monday: $24 billion three-month bills and $24 billion six-month bills.

Resnik Asset Management Co., Inc. 69 Fairfield Road, Yonkers, New York 10705 (914-423-5733)